Gulfport Energy Corporation Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

DERIVATIVE INSTRUMENTS

DERIVATIVE INSTRUMENTS

6 Months Ended

Jun. 30, 2021

General Discussion of Derivative Instruments and Hedging Activities [Abstract]

Natural Gas, Oil and Natural Gas Liquids Derivative Instruments

Gulfport has established policies and procedures for managing commodity price volatility through the use of derivative instruments. The Company seeks to mitigate risks related to unfavorable changes in natural gas, oil and NGL prices, which are subject to significant and often volatile fluctuation, by entering into over-the-counter fixed price swaps, basis swaps, collars and various types of option contracts. The derivative instruments allow the Company to mitigate the impact of declines in future commodity prices by effectively locking in a floor price for a certain level of the Company’s production. However, these instruments also limit future gains from favorable price movements. The volume of commodity derivative instruments utilized by the Company may vary from year to year based on forecasted production.

Fixed price swaps are settled monthly based on differences between the fixed price specified in the contract and the referenced settlement price. When the referenced settlement price is less than the price specified in the contract, the Company receives an amount from the counterparty based on the price difference multiplied by the volume. Similarly, when the referenced settlement price exceeds the price specified in the contract, the Company pays the counterparty an amount based on the price difference multiplied by the volume. The prices contained in these fixed price swaps are based on the NYMEX Henry Hub for natural gas, the NYMEX WTI for oil and Mont Belvieu for propane, pentane and ethane. Below is a summary of the Company’s open fixed price swap positions as of June 30, 2021.


	Location	Daily Volume	Weighted Average Price
Natural Gas (MMBtu/day)
Remaining 2021	NYMEX Henry Hub	221,500	$	2.79
2022	NYMEX Henry Hub	80,411	$	2.80

Oil (Bbl/day)
Remaining 2021	NYMEX WTI	3,250	$	57.35
2022	NYMEX WTI	1,000	$	67.00

NGL (Bbl/day)
Remaining 2021	Mont Belvieu C3	3,100	$	27.80
2022	Mont Belvieu C3	496	$	27.30

In the second half of 2019, the Company sold 2022 and 2023 natural gas call options in exchange for a premium, and used the associated premiums to enhance the fixed price on certain natural gas swaps that settled in 2020. Each call option has an established ceiling price of $2.90/MMBtu. If monthly NYMEX natural gas prices settle above the $2.90 ceiling price, the Company is required to pay the option counterparty an amount equal to the difference between the referenced NYMEX natural gas settlement price and $2.90 multiplied by the hedged contract volumes.

Below is a summary of the Company's sold natural gas call option positions as of June 30, 2021.


	Location	Daily Volume	Weighted Average Price
Natural Gas (MMBtu/day)
2022	NYMEX Henry Hub	152,675	$	2.90
2023	NYMEX Henry Hub	627,675	$	2.90

The Company entered into costless collars based off the NYMEX WTI and Henry Hub oil and natural gas indices. Each two-way price collar has a set floor and ceiling price for the hedged production. If the applicable monthly price indices are outside of the ranges set by the floor and ceiling prices in the various collars, the Company will cash-settle the difference with the hedge counterparty.

Below is a summary of the Company's costless collar positions as of June 30, 2021.


	Location	Daily Volume	Weighted Average Floor Price		Weighted Average Ceiling Price
Natural Gas (MMBtu/day)
Remaining 2021	NYMEX Henry Hub	575,000	$	2.58	$	2.97
2022	NYMEX Henry Hub	406,747	$	2.58	$	2.91

Oil (Bbl/day)
2022	NYMEX WTI	1,500	$	55.00	$	60.00

In addition, the Company entered into natural gas basis swap hedge contracts. If the applicable monthly price indices are outside of the ranges set forth in the various natural gas basis swap contracts, the Company will cash-settle the difference with the hedge counterparty.

Below is a summary of the Company's natural gas basis swap positions as of June 30, 2021.


	Gulfport Pays	Gulfport Receives	Daily Volume	Weighted Average Fixed Spread
Natural Gas (MMBtu/day)
Remaining 2021	Rex Zone 3	NYMEX Plus Fixed Spread	66,576	$	(0.16)

2022	Rex Zone 3	NYMEX Plus Fixed Spread	24,658	$	(0.10)

Balance Sheet Presentation

The Company reports the fair value of derivative instruments on the consolidated balance sheets as derivative instruments under current assets, noncurrent assets, current liabilities and noncurrent liabilities on a gross basis. The Company determines the current and noncurrent classification based on the timing of expected future cash flows of individual trades.

The following table presents the fair value of the Company’s derivative instruments on a gross basis at June 30, 2021 and December 31, 2020:


	Successor		Predecessor
	June 30, 2021		December 31, 2020

Short-term derivative asset	$	2,223	$	27,146
Long-term derivative asset	3,014		322
Short-term derivative liability	(192,730)		(11,641)
Long-term derivative liability	(113,470)		(36,604)
Total commodity derivative position	$	(300,963)	$	(20,777)

Gains and Losses

The following tables present the gain and loss recognized in net (loss) gain on natural gas, oil and NGL derivatives in the accompanying consolidated statements of operations:


	Net (loss) gain on derivative instruments
	Successor		Predecessor
	Period from May 18, 2021 through June 30, 2021		Period from April 1, 2021 through May 17, 2021		Three Months Ended June 30, 2020
Natural gas derivatives	$	(126,953)	$	(101,029)	$	35,689
Oil derivatives	$	(5,357)	$	(4,395)	$	(7,937)
NGL derivatives	$	(7,348)	$	(1,837)	$	(781)

Total	$	(139,658)	$	(107,261)	$	26,971


	Net (loss) gain on derivative instruments
	Successor		Predecessor
	Period from May 18, 2021 through June 30, 2021		Period from January 1, 2021 through May 17, 2021		Six Months Ended June 30, 2020
Natural gas derivatives	$	(126,953)	$	(126,442)	$	81,542
Oil derivatives	$	(5,357)	$	(6,126)	$	44,937
NGL derivatives	$	(7,348)	$	(4,671)	$	139
Contingent consideration arrangement	$	—	$	—	$	(1,381)
Total	$	(139,658)	$	(137,239)	$	125,237

Offsetting of Derivative Assets and Liabilities

As noted above, the Company records the fair value of derivative instruments on a gross basis. The following table presents the gross amounts of recognized derivative assets and liabilities in the consolidated balance sheets and the amounts that are subject to offsetting under master netting arrangements with counterparties, all at fair value.


	Successor
	As of June 30, 2021
	Gross Assets (Liabilities)		Gross Amounts
	Presented in the		Subject to Master		Net
	Consolidated Balance Sheets		Netting Agreements		Amount
Derivative assets	$	5,237	$	(5,237)	$	—
Derivative liabilities	$	(306,200)	$	5,237	$	(300,963)


	Predecessor
	As of December 31, 2020
	Gross Assets (Liabilities)		Gross Amounts
	Presented in the		Subject to Master		Net
	Consolidated Balance Sheets		Netting Agreements		Amount
Derivative assets	$	27,468	$	(25,730)	$	1,738
Derivative liabilities	$	(48,245)	$	25,730	$	(22,515)

Concentration of Credit Risk

By using derivative instruments that are not traded on an exchange, the Company is exposed to the credit risk of its counterparties. Credit risk is the risk of loss from counterparties not performing under the terms of the derivative instrument. When the fair value of a derivative instrument is positive, the counterparty is expected to owe the Company, which creates credit risk. To minimize the credit risk in derivative instruments, it is the Company’s policy to enter into derivative contracts only with counterparties that are creditworthy financial institutions deemed by management as competent and competitive market makers. The Company’s derivative contracts are spread between multiple counterparties to lessen its exposure to any individual counterparty. Additionally, the Company uses master netting agreements to minimize credit risk exposure. The creditworthiness of the Company’s counterparties is subject to periodic review. None of the Company’s derivative instrument contracts contain credit-risk related contingent features. Other than as provided by the Company’s revolving credit facility, the Company is not required to provide credit support or collateral to any of its counterparties under its derivative instruments, nor are the counterparties required to provide credit support to the Company.